Last reviewed 9 September 2026
Heads of terms, also called a term sheet, letter of intent or memorandum of understanding, record the commercial shape of a deal before the full documents are drafted.
They are used for company and business sales, joint ventures, investments, distribution arrangements and larger supply contracts, and their real value is forcing both sides to agree the deal in writing while the goodwill is still fresh.
This guide explains how they are normally used in England and Wales. It is general information rather than advice, and you should have any document you are about to sign reviewed for your own circumstances.
Are heads of terms binding?
Usually they are intended to be mostly non binding on the commercial points, with a small number of clauses expressly stated to be binding. The critical point is that intention must be stated clearly in the document.
Marking the document subject to contract and stating expressly which clauses bind is what makes the position clear. Without that, a court looks at the words used and the parties' conduct, and a document the parties assumed was a summary can turn out to be enforceable.
The clauses that normally do bind
Confidentiality, exclusivity or lock out for a defined period, who bears their own costs, governing law and jurisdiction, and sometimes a standstill on talking to other buyers or investors.
Exclusivity deserves particular attention. A buyer or investor spending money on due diligence will want it, and a seller should limit its length and make sure it falls away if the other side changes the headline terms.
What to include
The parties and the correct legal entities, what is being bought, sold or contributed, the price or pricing mechanism and how it is paid, any deferred consideration or earn out, conditions to completion, the expected timetable, and who does what during the period before signing.
For a joint venture also cover the ownership split, how it is funded, board composition and voting, reserved matters, what happens on deadlock and how a party exits. For a supply arrangement, cover term, volumes, service levels, liability position and termination rights, because these are the points that later slow the long form drafting.
Common traps
Leaving the price mechanism vague, so completion accounts or an earn out becomes a fresh negotiation. Recording an agreement to agree, which is generally unenforceable. Omitting warranties and indemnities entirely, so the risk allocation is fought over at the end.
Naming the wrong entity, agreeing an open ended exclusivity period, and continuing to negotiate by side email in parallel with the document are the other recurring problems.
How they fit the deal timetable
The usual sequence is a confidentiality agreement, then heads of terms, then due diligence, then long form documents, then exchange and completion. The heads set the agenda for due diligence and let each side brief its advisers on the same deal.
Where the deal changes materially during diligence, update the heads rather than letting the long form drafting drift away from what was agreed. A short amendment is cheaper than a dispute about what the parties had settled.
How much drafting effort is right
One to three pages for a straightforward supply arrangement, more for a share sale or joint venture. The aim is enough detail that neither side can be surprised, not a draft of the final agreement.
Having them reviewed before signature is usually a small piece of work and often the highest value hour spent on the whole transaction, because it is the point at which the risk allocation is easiest to change.
Key points
- State clearly that the document is subject to contract and which clauses bind.
- Confidentiality, exclusivity, costs and jurisdiction are the usual binding terms.
- Pin down the price mechanism rather than leaving it to be agreed.
- Cover governance, funding and exit for a joint venture.
- Check the entity names and the exclusivity period carefully.
- Update the heads if the deal changes during due diligence.
Frequently asked questions
- What is the difference between heads of terms and a contract?
- Heads of terms summarise the commercial deal and are usually mostly non binding, while the contract is the full, enforceable agreement. The heads set the agenda for drafting the contract.
- Does subject to contract make the whole document non binding?
- It is strong evidence that the parties did not intend to be bound on the commercial terms, but it is not a guarantee for every clause. Say expressly which clauses are binding and which are not.
- How long should exclusivity last?
- Long enough for the buyer or investor to complete due diligence, and no longer. A defined period with a clear end date, and an early release if the headline terms change, is the balanced position.
- Do I need a confidentiality agreement as well?
- Usually yes, and typically before the heads. It protects information shared during early discussions and can stand separately from the deal documents.
- Can heads of terms be signed electronically?
- In most commercial situations yes, provided the signatory has authority and the document is not one of the limited categories with special formality requirements. Take advice if you are unsure about the document type.